Question

Delizzia, a family owned business, produces and delivers potato chips to supermarkets and mom & pop stores. Located in Buenos Aires, Argentina, Delizzia is planning to expand its operations to cover other major Argentinian cities such as Cordoba and Rosario. This expansion will require Delizzia to set up a new distribution center and acquire new vehicles for last-mile distribution. Due to budget constraints, the company will only be able to expand to one city at a time. Therefore, Delizzia needs to decide if investing in Cordoba or Rosario makes more economic sense. The company is considering a time horizon of five years to make the decision. Assume the tax rate is 40% and the discount rate for Delizzia is 15%. Ignore inflation.

The table below shows the projections (incremental sales, COGS, operating expenses and depreciation) anticipated for expanding Delizzia's operations to Cordoba in millions of Argentine pesos.

Cordoba's Incremental Income Statement (in millions of Argentine pesos)

	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	56	80	140	156	130
COGS	30	34	64	67	52
Gross Income	26	46	76	89	78
Operating Expenses	11	22	40	46	39
Operating Income (EBITDA)	15	24	36	43	39
Depreciation	6	6	6	6	6
Operating Income (EBIT)	9	18	30	37	33
Income Tax	3.6	7.2	12.0	14.8	13.2
Net Operating Profit After Taxes (NOPAT)	5.4	10.8	18	22.2	19.8

Expanding to Cordoba will require an investment of 30,000,000 Argentine pesos (to be paid in Year 0) to remodel the rented space for the distribution center and purchase the vehicles. Similarly, additional working capital will be required, but it comes in the second half of Year 1 after the remodeling is finished. That is why there is no working capital in Year 0. See table below:

Cordoba's Incremental Adjustments (in millions of Argentine pesos)

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Depreciation	-	6	6	6	6	6
Net Capital Expenditures	-30	-	-	-	-	-
Net Working Capital Investment	-	-19	-29	-16	-7	47
Free Cash Flows	-30	-7.6	-12.2	8	21.2

Note.- A negative number for the capital expenditure and working capital represents a cash outflow. The positive working capital cash flow in the final period may not equal the sum of the previous investments due to accounting assumptions, such as not collecting all receivables.

The company uses straight-line depreciation over 5 years. The terminal value is zero.

What are the projected Free Cash Flows for year 5 associated with expanding to Cordoba?

Part 1

The table below shows the projections (incremental sales, COGS, operating expenses and depreciation) anticipated for expanding Delizzia's operations to Rosario in millions of Argentine pesos.

Rosario's Incremental Income Statement (in millions of Argentine pesos)

	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	58	80	148	150	128
COGS	22	32	60	68	53
Gross Income
Operating Expenses	5	11	37	36	23
Operating Income (EBITDA)
Depreciation	10	10	10	10	10
Operating Income (EBIT)
Income Tax
Net Operating Profit After Taxes (NOPAT)

They company uses straight-line depreciation over 5 years. Assume terminal value of zero.

Calculate the projected NOPAT (Net Operating Profit After Tax) for years 1-5.

What would be the projected NOPAT for year 1 associated with expanding to Rosario?

What would be the projected NOPAT for year 2 associated with expanding to Rosario?

What would be the projected NOPAT for year 3 associated with expanding to Rosario?

What would be the projected NOPAT for year 4 associated with expanding to Rosario?

What would be the projected NOPAT for year 5 associated with expanding to Rosario?

Part 2

Expanding to Rosario will require an investment of 50,000,000 Argentine pesos (to be paid in Year 0) to remodel the rented space for the distribution center and purchase the vehicles. Similarly, additional working capital will be required, but it comes in the second half of Year 1 after the remodeling is finished. That is why there is no working capital in Year 0. See table below:

Rosario's Incremental Adjustments (in millions of Argentine pesos)

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Depreciation	-	10	10	10	10	10
Net Capital Expenditures	-50	-	-	-	-	-
Net Working Capital Investment	-	-18	-30	-11	-3	41

Note.- A negative number for the capital expenditure and working capital represents a cash outflow. The positive working capital cash flow in the final period may not equal the sum of the previous investments due to accounting assumptions, such as not collecting all receivables.

Calculate the projected Free Cash Flows immediately and for years 1-5.

What are the projected Free Cash Flows immediately associated with expanding to Rosario?

What are the projected Free Cash Flows for year 1 associated with expanding to Rosario?

What are the projected Free Cash Flows for year 2 associated with expanding to Rosario?

What are the projected Free Cash Flows for year 3 associated with expanding to Rosario?

What are the projected Free Cash Flows for year 4 associated with expanding to Rosario?

What are the projected Free Cash Flows for year 5 associated with expanding to Rosario?

Answer 1

Projected free cash flows of year 5 with expansion into Cordoba :

FCF = NOPAT + depreciation + Net Working Capital Investment = 19.8 + 6 + 47 = $72.8 million pesos

Part 1]

NOPAT in years 1 to 5 is below :

Gross income = sales - COGS

EBITDA = gross income - operating expenses

EBIT = EBITDA - depreciation

NOPAT = EBIT - income tax

A B C D Rosario's Incremental Income Statement (in millions of Argentine pesos) Year 5 1 Year 4 148 Year 2 Year 1 Year 3 2 128 3Sales 58 80 150 60 68 4 COGS Gross 5 Income Operating 6 Expenses Operating 22 32 53 36 48 88 82 75 37 36 23 Income 7 (EBITDA) 31 37 51 Ме 52 8 Depreciation Operating 10 10 10 10 10 Income 36 42 27 9 (EBIT) 21 41 10 Income Tax Net Operating 8.4 16.4 14.4 16.8 10 8 Profit After Таxes 21.6 11 (NOPAT) 12.6 24.6 25. 16.2 12

Кб A B C G Rosario's Incremental Adjustments (in millions of Argentine pesos) Year 2 1 Year 1 Year 4 21.6 24.6 Year 5 Year 0 Year 3 12.6 16.2 3 NOPAT 25.2 4 Depreciation Net Capital 5 Expenditures Net Working Capital 6 Investment 10 10 10 10 10 50 0 -18 30 -11 41 23.6 -38 76.2 7 FCF 50 28.6 4.6